Wednesday, August 13, 2008

Georgia: seven days on and how Russia can lose

All of the Western powers accept that the invasion of Georgia will fundamentally change the way that NATO and the European Union deal with the Kremlin.

However there is a deep disagreement about how far the West is able to go in punishing the Russian Federation for the illegal invasion of its sovereign, democratic neighbour. Some would argue that Russia has grown so strong that it is inevitable that the West will be forced to cave in.

Fortunately a group of states- roughly speaking in the North and West of the NATO alliance and led by the United States- has made it quite clear that they intend to go beyond a token slap on the wrist.

Planned joint exercises have been cancelled, and Russia's exclusion from the G-8 appears all but inevitable. As the fighting continues, those who have advocated a softly-softly approach to Russia- such as Germany- are reluctantly facing the need for a tough response.

Of course these last few days most of us have been outraged at Russia's actions. Now we must, in the bleak light of the new situation, begin to plan how best to meet the challenge of the aggressive and reckless Putin regime.

Despite much rather defeatist talk, in fact the West holds a strong hand- and the threat of Russia is not in the same league as the threat that the Soviet Union posed even twenty years ago. The USSR was economically isolated, Russia ostensibly wishes to join the global economy, indeed despite the windfall of high energy prices over the past few years, the infrastructure and the manufacturing base of Russia have withered in the face of neglect on the one hand and the high Rouble on the other. Russia continues to face a demographic implosion which, according to CREES, on current trends will leave the country populated by less than one hundred million by 2030, a fall of almost a third from today's population.

Ironically, the weakness of the Western economies that seems likely over the next two years will have a dramatic negative influence on Russia, with the forecast of a fall to $70/bbl looking far more likely than the suggestion that oil will rise from today's price of $114/bbl. Although Russia has largely paid off its debts and indeed amassed a large reserve, the scale of infrastructure breakdown is way beyond even the roughly $ 490 billion they have accumulated. In short, despite the government surplus, Russia has not invested. Russia's balance sheet is liquid but, in the long term, not very solid. Further weakness in energy prices will require significant government expenditure cuts. Nor is China likely to take up the slack, since the Chinese economy too has begun to slow dramatically. Meanwhile, Russia has had to deal with resurgent inflation- already topping 14%. The narrowness of the Russian economy is a significant weakness, and following the BP-TNK fiasco, international investors were already getting cold feet about the breakdown of rule of law in the country. International capital will demand an increasing risk premium for its investments in Russia, and vital inward investment in industry is now unlikely to take place.

Following the final agreement on the Russo-Chinese border, which was signed three weeks ago, it is clear that the previously hostile relations between the two states were set to warm. However, despite the irritation that the Chinese leadership clearly feel concerning Western support for Tibet, the scale of the Western, especially American, relationship with China is a massive multiple of anything Russia can offer. Of course China has strengths in this relationship- its large holdings of US securities gives China significant leverage. However the Chinese idea of "face" means that pressure exerted would be kept within certain limits- for the size of holdings are such that they constitute a symbiotic relationship, with China providing liquidity to fund American purchases of Chinese goods. Russia's bluster and violence are a sharp contrast to Chinese restraint. The result is that far from Russia using China, China will use Russia as a lever for warmer relations with the West, which in any event will now seek much warmer relations with Beijing, as George Bush's presence at the Olympic Games opening ceremony already makes plain.

I do not often agree entirely with David Cameron, but it would be churlish to deny that his piece in today's Telegraph is absolutely appropriate. the Russian rampage that is continuing through Georgia is an outrage that can not go unanswered. In my opinion, Russia has much to lose- it is time to speak quite bluntly and to demonstrate totally clearly that without a return to civilised behaviour, Russia will face the same treatment as its legal predecessor the Soviet Union: containment and isolation- backed by a credible threat of force should Russia cross the line once more.


Anonymous said...

by a credible threat of force should Russia cross the line once more. - Dream on. Maybe they might intervene for Ukraine but Georgia at the monent as the economist says is not prepared to bat for. As far as China goes there is a huge fly in your ointment Taiwan. China will do anything to get the capacity to deter them from De jure independence, which means being able to deter the US. The Russians can give them the weapons and the Oil that cannot be blockaded by the US. You are correct as to their caution but don't kid youself that they will cut Moscow off entirely. Expect a gigantic blind eye to be turned towards Moscow.


Anonymous said...

You say you entirely agree with David Cameron's piece. Do you agree with him that "energy security" is an issue that should guide foreign policy?

Anonymous said...
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